1. travel

Business Plan Analysis Simulation:
PEGASUS TRAVEL
(Pegasus Travel is not technically a business plan but rather
a Business Plan Analysis Simulation. The plan is based on
an undergraduate project idea and a significant amount of
additional research and written input from the authors.
While the case contains enough depth to warrant a robust
discussion on the Pegasus' strategy and future direction as
a bona fide business, the real objective is to aid the students
in more effectively completing their own business plans.)
643
Pegasus Travel.com:
*
Fasten Your Seatbelts!
A Business Plan Analysis and Simulation
*
Boston College Professors Michael Peters and Gregory Stoller adapted this business plan and
prepared this case as the basis for class discussion rather than to illustrate either effective or
ineffective handling of an administrative situation.
Copyright © 2001, December 2003. Michael Peters & Gregory Stoller. Revised No part of this
publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or
transmitted in any form or by any means – electronic, mechanical, photocopying, recording or
otherwise – without the permission of the writers.
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I. Introduction
Pegasus Travel.com
1975 Beacon Street
Brookline, MA 02446
P.O. Box 1234, U.S.A.
(617) Pegasus
Co-owners:
Kimberly Peters
J. H. Welch
Christa Bentley
Yoriko Nomo
Sandrine Bouchet
Description of Business:
This Company will cater to the need of people age 55 and over who want the flexibility in
traveling by groups or individually. Services will include a web site where customers can create their own
customized vacation package or choose from the pre-set travel packages of the week and chat with people
who are also interested in traveling with them. Customers will also be able to locate travel buddies if they
have an idea of a destination, but do not have a large enough group for traveling.
Financing:
Initial financing required is $2,105,185, and will be received from venture capitalists and bank
loans that will be paid off over 12 years. The invested money from venture capitalists and bank loans will
allow Pegasus Travel, Inc. (“Pegasus”) to cover office space, office equipment and supplies, advertising,
technology development, salaries and wages and utilities.
This report is confidential and is the property of the co-owners listed above. It is intended only for
use by the person to whom it is transmitted and any reproduction or divulgence of any of its contents
without the prior written consent of the Company is prohibited.
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II. Executive Summary
Pegasus Travel.com (“Pegasus” or “the Company”) is a niche online operator specializing in
customized and package tours for the age group of 55 and over (referred to as seniors). It is based on the
belief that, as an increasing number of seniors become users of the Internet, combined with an interest in
traveling, they will provide a lucrative market for Pegasus. The Company provides the option for
flexibility in its tours, allowing the consumer to decide on length of stay, budget, destination and so forth.
Apart from the customized tours, tour packages will also be sold. Through its web site, seniors are able to
gain insight into tours they might be interested in as well as chat with other similarly oriented people. The
comprehensive web site provides links to relevant sites, free e-mail addresses and a sense of community.
Pegasus will align itself with a well-known travel agency, Carlson Wagonlit Travel. Its reputable name
will give Pegasus’ customers assurance and trust. The Company can also take advantage of Carlson’s
expertise and operations in many parts of the world.
Pegasus believes that now is the right time to be entering the travel industry. Currently, travel is
the largest sector of e-commerce, accounting for 32% of total sales. Half of these revenues are generated
from online travel agencies such as the proposed Company. The online travel industry is expected to
explode, from $8 billion this year to about $20 billion in 2002, and predictions of about $29 billion in
2004.
Apart from the industry itself, the target market of seniors is growing significantly. The addition
of baby boomers in five years means that seniors will continue to be the fastest growing demographic
group. In 2004, about 27% of all seniors will have access to the Internet. Currently, research indicates that
seniors spend 8.3 hours a week online, more time than the average college student. Furthermore, seniors
have more disposable income, and time on their hands, due to the lack of financial or employment
commitments. Seniors spend most of their recreational budget on traveling and want to explore new
opportunities that have escaped them in the past.
Pegasus plans to attract and retain customers through its advertising and services. Banner ads will
be placed on the top-ten senior and baby boomers web sites in order to generate traffic and create brand
awareness. Print ads in leisure and senior magazines will supplement online advertising. A direct mail
campaign including promotions, discounts and upcoming tours is also planned, for seniors who have
become members of the web site community.
In order to start-up the business, the Company foresees that it will require $2.1 million in venture
capital. The high start-up costs are attributable to the aggressive marketing the Company will undertake.
The main shareholders of the group will not be drawing any salary, but salary expense will come from the
customer service representatives hired. Since the Company will act as an outsource agent to Carlson and
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receive a commission in return, the Company expects to break even in four years. As more expertise is
gained from Carlson and the Company’s operations expand, the need for outsourcing will be minimized.
Future prospects for the Company are very attractive. With the growth of the market and industry,
Pegasus plans to gradually expand into the next largest market with the most potential – Europe, and will
continue to offer the same quality service to these new customers. Pegasus will also continue to please its
customers by offering special event packages, such as birthdays and golden anniversaries. Furthermore,
the Company will begin providing tours for the disabled, believing that there are very few players in the
market which target this particular segment.
The diverse service that Pegasus offers will attract a niche market. The growth of the online travel
industry, coupled with the potential of the target market, highly increases the Company’s chances of
success. By focusing on quality, service and value, the Company will be able to attract and retain its
customer base. The Company believes that it will succeed in this market segment, and grow substantially
as more experience and expertise is gained.
III. Industry Outlook, Forecast & Trends
The travel and tourism industry is a leader in E-commerce. According to Forrester Research,
travel and tourism will account for 32 percent of all business-to-consumer on-line sales in 2003. On-line
sales of travel surged over 200 percent in the last year alone, increasing from $3.1 billion to $8 billion in
2001. The travel and tourism industry is expected to generate almost three times as much revenue as
originally predicted, surging to $20 billion in 2002.
By 2004, Forrester Research predicts this segment will become the largest business-to-consumer
product, in terms of dollar volume, accounting for 12 percent of the overall travel market. In addition,
total travel spending is forecast to grow 4.2 percent annually, increasing from $502 billion in 1998 to
$630 billion in 2003. Domestic travel spending is forecast to grow 5 percent to reach $518 billion in
2003. Spending by international visitors is expected to reach $119 billion in 2004, growing 5.5 percent
annually between 1999 and 2004.
The primary transportation sectors in the travel and tourism industry are airlines, rental cars,
railways, and cruise lines. The Federal Aviation Administration forecasts that in response to customer
demand, U.S. Airlines will continue to increase capacity 4.5 percent per year through 2011. Amtrak’s
business plan projects that revenues will grow to $2.5 billion in 2003. Chief among the railway revenue
generators will be the Acela high-speed service between Boston, New York, and Washington D.C, which
is projected to add $180 million in revenues when it is fully operational in 2001 or 2002.
According to the Cruise Lines International Association (CLIA), cruise lines have committed
over $10 billion to building and launching more than 35 new ships, including the world’s largest
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passenger vessel ever, by the end of 2003. CLIA expects that nearly 7 million travelers will take a cruise
vacation in the year 2002.
Moreover, with healthy growth projected for international travel and consistent growth
expectations for domestic travel, total spending for travel and tourism in the United States will grow at
least 5 percent annually, reaching a record $630 billion in 2003.
Growth will start slowly, but expected recoveries in Europe and Asia will spur the United States
into also record-breaking international visitation levels in 2004, when arrivals will reach nearly 55 million
visitors. Receipts are projected to surpass $119 billion. Over the next 4 years, arrivals from each world
region are projected to increase proportionately. By 2004, Mexico and Canada alone will account for just
over 47 percent of total in-bound visitors.
A significant trend that Pegasus seeks to exploit is the anticipated growth of the European market
on the Internet. In general, Europeans spend more on travel than other world regions, generating $10.4
billion in sales revenue this year, and predicted to increase to $23.4 billion in 2004. Furthermore, online
travel is becoming increasingly popular with European travelers as the demand for online travel related
services increased by 300% in 2000, with 6.4% of all trips initiated through the Internet. The Company
plans to take advantage of this trend by expanding into European markets in the foreseeable future.
Forecast for Pegasus
According to recent analysis reports published by the NUA, future revenues in the e-commerce
travel industry are expected to increase substantially. Pegasus can expect to take advantage of the
opportunities provided by this growing segment. Phocus Wright, a company which incorporates airfare,
accommodation, packaged tours and related travel and tourism services, reported that this year agencies
generated 54% of E-commerce dollars spent for the travel services industry. The size of the overall
market assures that the Company can expect to make a good return on its investment. A report by Jupiter
Communications states that the online travel industry in 2000 yielded $3.2 billion in sales. Expectations
are for sales to reach $29 billion in 2004 and surge to $63 billion by 2007. If Pegasus can successfully
reach even .01% of this market, the Company could expect to have $2.9 million worth of sales in 2004.
Market Segmentation
The Travel and Leisure Industry can be broken down into three major segments: price, age and
purpose for travel. Pegasus believes that an in-depth knowledge of these market sectors will help the
Company to focus its marketing efforts.
Price is one of the more important factors in determining market segmentation, as it influences a
consumer’s travel choices. Customers have come to demand what they pay for. If a customer opts for an
expensive tour, he/she will expect better hotels, superior customer service etc. However, a budget traveler
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will choose the lowest possible price and forgo the extra frills. It is important to note that the majority of
customers look for value, which is a key component of Pegasus’ mission.
A second factor which influences market segmentation is the age of the customer. The age range
of the travel industry is large, ranging from college students to retirees, and different marketing strategies
will attract a variety of patrons. For example, a tour agency targeting college students might advertise low
priced tours at locations such as Cancun and Jamaica for spring break. On the other hand, business
oriented agencies might reach their customers by the quality of accommodation and services provided.
Lastly, the market can be segmented by the purpose for travel. The two main sub-categories are
leisure and business. Travel Agencies which target the leisure segment would incorporate tourist
attractions and sightseeing activities in their tours. Furthermore, their aim is to allow the customer to
enjoy their holiday and transportation with the business traveler in mind.
The Target Market
Pegasus targets the senior population (55 years old and over). The Company believes that this is
an important segment, as seniors tend to have more money and time, and travel more for leisure purposes.
Furthermore, the number of seniors using the Internet is expected to increase substantially in the near
future. According to a report from eMarketer, 27% of seniors are expected to be on the Internet by 2004.
The actual number of seniors however will be exploding, as the baby boomers move into this range (US
Census bureau reports that the over 55 population will increase by 6 million by 2006).
Forrester reports that the UK seniors (one of the first international markets the Company will
target) will number in the range of 3.2 million. According to Media Metrix, older users are the fastest
growing demographic group in the US Internet market. Other reports indicate seniors spend 8.3 hours per
week online, even more than the average college student. The combination of the explosive dollar amount
spent on online travel, the number of seniors expected to take to the Net, and the fact (from Media
Metrix) that older Internet users have and use the most credit cards, presents Pegasus with major
opportunities for growth and high returns.
Competitive Sectors
Travel is one of the most profitable industries worldwide, playing a major part in the American
lifestyle, as well as the national economy. In 1998, global tourist receipts reached $447.7 billion, making
it an attractive industry, with ample room for many players to fight for “a piece of the pie.”
The Company’s competitors in the travel and leisure industry can be broken down into the three
main sectors: traditional travel agencies, online travel agencies, and airlines (Examples are listed in
Exhibit 1). Traditional travel agencies provide full service, and are typically known as “brick and mortar”
organizations. Online travel agencies are companies which provide their services on the Internet, offering
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pricing and tour booking options. Lastly, airline companies sell their tickets directly to the consumer, with
both online and traditional booking services available. Each of these sectors has various strengths and
weaknesses (illustrated in Exhibit 2) and are at different stages of their respective growth cycle.
Traditional Travel Agencies
Traditional travel agencies are companies which provide travel information and tour bookings to
their customers mostly through the phone, and face-to-face meetings. While traditional travel agencies do
not offer “24 x 7 access,” they are making up for this disadvantage by providing the “personal touch” that
the Internet does not provide. Moreover, while a consumer has to research online for the best possible
deal, the traditional travel agent will do everything for the patron. The forecast for traditional travel
agencies is bleak, as most analysts are predicting that the growth in online travel services will cause a
decline in the need for traditional agencies. However, partnering with online businesses will allow brick
and mortar travel agencies to remain viable. The Financial Times reported that 62% of every dollar spent
by the U.S. web shoppers is going to brick and mortar retailers that have online operations. Furthermore,
another study conducted by NPD Online Research revealed that 56% of on-line travelers reported having
completed reservations with a traditional agent after visiting a travel-related site. This could be due to the
fact that consumers tend to seek out the advice of a “live” person who will be able to offer them the
reassurance and expertise that they seek. Although many industry analysts predict sales growth to
decrease due to the advent of Internet travel resources, the traditional travel agency has had a compound
average growth rate of 6% over the past few years.
Online Travel Agencies
Online Travel is a rapidly growing segment of the travel and leisure industry. These agencies
provide travel planning on the Internet, enabling the consumer to compare costs and services at an easier,
quicker pace. Furthermore, most people use the Internet as the essential tool for acquiring travel
information. Lastly, online agencies offer the consumer the convenience of 24-hour access and flexibility.
They provide fast, interactive, and global services. Online travel can be broken down further into three
categories: full-service, name-your-price, and umbrella agents. Full service agents provide the service of a
traditional travel agent on the Internet. Name-your-price agents allow customers to quote a price they are
willing to pay, and will try to locate a seller who matches that price. Lastly, umbrella agents play the part
of the middleman, allowing a user to customize his/her preferences, and then matching those preferences
to a suitable travel agent. Analysts predict that online travel services will grow from $6 billion in revenue
to $29 billion by 2004 and $63 billion by 2007. Some factors that contribute to the significant rise in the
online travel industry include: the growing number of people buying online, the rise in individual
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spending on the Internet, and the growing number of American travelers (as a result of the strong US
economy).
Airlines
More and more airline companies are adopting a combination of traditional, and online travel
agent services. Airlines sell their tickets directly to the consumer, bypassing service fees that the agencies
charge. While the customer might not have as much flexibility in choosing among different fares, airlines
reward customers for their loyalty through perks such as frequent flyer programs.
However, passengers still have little or no loyalty to a particular airline, citing price as the
primary factor affecting their purchase decision. Airlines are concerned with organizations such as
Priceline and Travelocity, who are luring away many customers, and have retaliated by forming an
alliance named Hotwire.com. Hotwire sells discounted airfares for “distressed seats,” seats that are still
empty at the last minute. By doing this, airlines hope that they can recoup their losses and concurrently
break into the online travel industry.
Competitive Advantage
Pegasus differentiates itself from its competition through convenience, service, target market
selection, and personalization. The Company plans to incorporate a “click and mortar” approach,
combining the convenience and flexibility of the Internet with the “human touch” of a 24-hour customer
service agent. The Company believes that solid customer responsiveness is crucial, as its target market
demands a high level of service, quality and value for money spent. Another factor that makes the
Company unique is the specific market segment that Pegasus is focusing on. Most travel agencies focus
on a broad range of segments. A third competitive advantage that the Company offers is the ability to
choose and personalize a tour according to the customer’s preferences. Through the combination of these
factors, the Company believes it can successfully carve out a niche market, and operate profitably.
IV. Description of Value
Pegasus is an online travel agency that caters to the needs of people aged 55 and above who are
looking for flexibility and personalized travel experiences. Pegasus will provide an online web site in
which customers can search and browse. There will also be a chat room that will list the pre-set travel-ofthe-week package from Pegasus. However, the package will also be adaptable to a customer’s needs, in
terms of time, destination and entertainment. Once a customer logs in with his or her username and
password, a customer will be able to chat with others to collect information prior to booking.
The web site will also offer a discussion board where customers can post a request to find travel
buddies, for travel ideas which are different from the pre-set package. Other customers who are interested
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in a travel plan may only contact other parties through the permission of the patron who initiated the
original itinerary.
Because Pegasus’ target customers are baby boomers and seniors, the office will be located on
1675 Beacon Street. Pegasus decided to lease the space to incur a reasonable rent expense. The place has
adequate space for computers, printers and also contains a guest room where customers can share their
opinions personally with a travel agent. The location of this office is perfect for the business because it is
in the heart of Washington Square in Brookline, where most of the successful baby boomers and seniors
live.
The business will require employees with at least a bachelor’s degree or equivalent. Personnel
would also be required to have some experience with the travel and tourist industry, in order to
understand what customers might want, and how to satisfy their needs. In addition, Pegasus may need
web developers and web designers for maintaining the Internet site. The equipment that will be needed
for this business are computers, printers, database servers and application servers, and they will be
purchased, in order to avoid overpriced equipment leases.
The entrepreneurs of the business are well educated people with different backgrounds and
experiences. Kim Peters has worked in a variety of organizations, ranging from small entrepreneurial
firms (Mann & Co.) to large corporations (The American Red Cross). She has experience in customer
service and promotions.
Christa Bentley is currently earning her Bachelor’s degree in Finance and Marketing at Boston
College. Through her coursework and academic experience, she has acquired knowledge on the various
aspects of finance. Furthermore, her employment in the largest bank in Singapore helped her develop her
analytical skills.
Jack H. Welch is highly qualified as a public relations and information technology manager,
having worked in the John Hancock Agency in Boston as a Management Information System Intern.
Yoriko Nomo’s resume includes working for nine months in Carlson Wagonlit as a travel agent.
Her experience of serving customers, arranging trips, making reservations, and issuing tickets over the
computer will allow the Company to begin its operations efficiently. She has also worked for three
months as a registration representative at SkyPerfect TV in Japan, where she assisted customers with
registration over the phone, and supported them with the appliances’ technical problems.
Sandrene Bouchet is currently “on exchange” at Boston College from a business school in
France. Her work experience included a stint at Cora Supermarket where she was in charge of sales
analysis in the food department. She was also responsible for submitting a new map of this department to
increase sales figures.
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V. Operational Plan
When the customer has logged on to the Company’s web site (see Exhibit 3), he/she will be able
to browse through the special promotions, as well as have the option to research and create their own tour
package. Options include choosing their price, location, special dietary requirements, and locations they
would specifically like to visit. Once all these factors are in place, the user will be asked to fill out a form
which requires general information. At this time, they are entitled to receive the Company’s newsletter, as
well as promotions-of-the-month. They will also receive their own e-mail account when they have chosen
a username and password. The price estimate will be mailed to their account, or a representative will call
them (depending on their preferences), at which point they can decide whether or not to accept the tour
package.
After accepting the package, Pegasus will make the necessary arrangements. The firm will use
reservation systems such as Sabre and Apollo for making air and hotel reservations. These companies
offer various fares which are regularly updated and published on the computer. Reservation agencies are
not affiliated with hotels and airlines, and merely provide options, allowing travel agents to choose the
best fit for the passenger. Once a selection has been made, a confirmed ticket will be printed out and
issued. Pegasus will pay the reservation agencies weekly for the tickets sold. Pegasus receives a
commission from the reservation agency for every ticket booked and paid for. The commission will then
be distributed among the sales representatives.
After the tour package is finalized, the customer will be notified by a response of his/her choice.
An e-mail message will appear with an itinerary of the trip. If the customer is unfamiliar or uncomfortable
with email, a customer service representative will call and explain the travel details. A letter will also be
sent confirming their order. Changes can be made to the tour during this period. When the customer is
happy with their travel plans, the money will be transferred and the tour will be finalized. At this time, the
terms and conditions of each tour will be agreed upon via the web site. The agreement will be legally
binding and commit the customer to the price of the trip.
A small welcome packet will be sent to reinforce the customer’s choice of the Company, and the
great value they will be receiving. Emergency contact numbers will be provided for cities visited.
Through agreements with tour providers in Europe, Asia, Australia, Africa, and South America,
customers will have access to any additional assistance needed. They will also be given detailed maps to
cities and country destinations booked for travel, recommendations on sites to visit, and transportation
options. Vouchers will be given for discount restaurant visits and popular locales. A small history of the
countries will be included, as well as information on local customs and laws. A small foreign language
card containing useful phrases will even be provided for customers to carry during this trip.
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Feedback will be a very important issue for improving service. For a limited time, customers will
have the opportunity to receive a discount on future travel by providing post-trip analysis on the web site
using a simple questionnaire. A feedback chat room will allow customers to hear from others during the
decision process both on where to go, and where to stay.
VI. Marketing Plan
Goals and Objectives
Based on Company research, online travel and tourism will become the largest business-toconsumer product, and account for 12 percent of the overall travel market by 2004, with sales surging to
about $29 billion.
Based on this predicted online market the short-term goal of the Company will be to reach $1
million in gross sales in the eighth month, and approximately $1.8 million by the end of the first year. The
effectiveness of word of mouth promotion will be key to the early success of Pegasus. Care packages and
customer service should enhance the customer’s attitude and motivate them to talk positively about the
Company to others.
Of the $29 billion that consumers are expected to spend in online travel and tourism, Pegasus’s
goal will be to achieve about .01% of that number for its market share. This translates to a goal of $2.9
million domestic gross sales revenue in 2004. Pegasus predicts to have losses in the first three years of its
operation, but with later entry into the European market, will achieve profits of approximately $700,000
in year five. The Company will also plan to exploit the anticipated growth of the European market by
capturing another .01% of market share, thus reaching $10 million in total gross sales revenue by year
five.
Pegasus will focus on the most lucrative segment of the population, which are the baby boomers
(55 years old and over) and the senior population. The Company believes this particular segment has
more money and time on their hands due to their retirement, and tends to travel more often for leisure
purposes than other segments. Seniors and baby boomers amount to 55 million people. Pegasus expects to
have market penetration of .02% or 11,000 customers after three years of operation, and will increase
steadily at a growth rate of 5% each year.
As mentioned earlier in the marketing strategy and promotion program section, Pegasus will
partner with info-mediary services such as e-How and Yahoo in its first year of operation. With the help
of these partnerships, the Company plans to have a distribution network covering approximately 45% of
the market. The Company also seeks to create an awareness level index of 65% by the third year of its
operation.
One of the biggest features of the web site will be the chat room, which will allow customers to
interact with other travelers. On scheduled nights, Pegasus will invite anyone interested in a selected city
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to come together to share experiences, and answer any questions about traveling to the area. Customers
wanting to travel together can also organize tours. The Company will also have a posting board for
customers who are looking for others with whom to travel. This will help older citizens and handicapped
persons find compatible travel companions.
Pegasus’ site will be launched in a predicted time frame of one and half years, after it has
received the sufficient amount of funds needed. The Company will outsource its web site development,
and operation, to a more experienced and professional web company. The customers will be able to set
the maximum amount of money that they wish to spend on any trip, and Pegasus will try to accommodate
that specified budget.
Pegasus will also receive a sales commission of 8.5% on every transaction that is made by each of
its agents. The sales promotion budget may be higher than other existing services, but Pegasus believes
this amount is necessary to motivate agents to satisfy the customer’s needs. The Company will advertise
its site heavily in the first three years of its operation, which contributes to the losses during this time.
Plans include click-on banners, television advertising, local and national newspaper buys, and travel
magazines. The anticipated media campaign will cost Pegasus about $1 million in the first year. The
Company will be promoting itself aggressively in the initial stages of operation, as brand awareness is
important in establishing a solid reputation, especially in the target market. It will be easier in the long run
to promote the Company’s name without having to extensively utilize mass media, and expend significant
dollars on an advertising program.
Strengths and Weaknesses
The firm’s offering of both online and “face-to-face” customer service is an important strength, as
it enables the Company to attract more customers, and to increase market share among baby boomers and
retirees. Pegasus’ 24-hour service is also important in achieving a competitive advantage. Targeting a
specific market is another strength for the Company, enabling it to offer those services that would attract
more baby boomers and retirees. In addition, an alliance with travel agencies in Europe will be beneficial
to its operations. Furthermore, having employees who are knowledgeable about the travel business, as
well as information technology, will be advantageous to the Company. Its web site can be easily arranged
and improved by the knowledge of IT in accordance with customers’ needs. Since employees are capable
of speaking more than one language, Pegasus may service foreigners who desire to speak Japanese,
Cantonese, Indonesian, and French.
One of the main weaknesses of the Company is its lack of a partnership with an airline. It can
only offer the best fares that are published on line. Those published fares might change as the departure
time approaches. Therefore, it is likely for the firm to demand immediate payments to customers before
the airfare increases. Secondly, since the firm anticipates operating only one retail location initially,
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customers who prefer “face-to-face” service might have to visit the office directly. This can be
inconvenient for customers who live far away from the Brookline, MA area.
Opportunities and Threats
As the market that Pegasus competes in grows significantly, the Company can take advantage of
the large market potential. After establishing a customer base, opportunities for further expansion will be
considered. Currently, the Company is focusing on the domestic market, having a strategic alliance with
other travel agencies around the world. However, with the growth of international markets, especially
Europe, Pegasus will gradually expand into those locations as well. As the Company grows, the need for
alliances will diminish. Lastly, Pegasus will broaden its services to include event packages such as
anniversaries, wedding vow renewal opportunities, and birthday packages to meet the demands of the
market.
Pegasus also faces threats that might hinder the Company’s growth. The travel industry relies
heavily on the health of the economy. If the economy is performing poorly, people are less inclined to
travel. The travel industry is also susceptible to the political and economic status of other countries. The
amount of tourists will significantly decline if a country is undergoing political strife, or has bad relations
with the United States.
The growth and profits in the industry makes it lucrative for other players to enter the market.
While the Company does target a niche market, competitors might find the same market big enough to
enter themselves. However, Pegasus will have established a significant market share by that time which
would create barriers to entry for a new player.
Service Development Strategy
The service that Pegasus provides is highly customized. The customer has the flexibility to tailor
his/her travel arrangements through a convenient web site. Because the service targets seniors and baby
boomers, the firm will try to meet all of their specific needs, such as providing a 24-hour customer service
support as well as a package containing emergency contacts and guidebooks. An emergency sheet that
can fold into a wallet or purse will provide contact numbers for everything from the loss of a passport to a
dispute with a hotel. The distribution of guidebooks will help the consumer get the most out of their
vacation. The goal of Pegasus is to provide value-added services, which cater to a specific target market
with a definite set of needs. The Company’s web site will provide the chance to customize the traveler’s
vacation and allow as much flexibility as the customer desires.
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Customer Service
Pegasus will provide a unique Emergency Customer Service hotline number. This service will
allow customers to contact a Pegasus agent, should there be any questions which arise or problems
encountered during their trip. This emergency hotline number will require Pegasus to hire employees who
are specifically trained to cater to customer needs in an emergency situation.
The hotline will also allow Pegasus to hear about the concerns of its customer base, whether it be
for their upcoming trips or from their past excursions. These concerns will be documented and discussed
during a regular meeting so that management can evaluate and improve its overall service quality.
Pricing
The Company will price the tour package competitively without compromising quality. However,
due to seasonal fluctuations in prices, certain times of the year will be more expensive than others. The
price of the package will take these price fluctuations into account, as is standard industry practice.
Pegasus will therefore find the best possible pricing combinations and include a 25% markup on the entire
package. This is an acceptable and reasonable markup for this industry, and once again in line with
industry standards. For example, a trip to Rome might cost $10,000 and Pegasus will then charge $12,500
to the customer. With the combination of discounts that lower the $12,500 price point, and the
Company’s follow-up services (care package and tour book), a high price-value relationship will be
attained.
Distribution
The channel of distribution for the Company begins when it receives the airline tickets, car rental,
and hotel bookings from a fare listing service such as ARC and TATA. The confirmation is immediate,
and the ticket can be printed out from the computer terminal. After the relevant documents have been
obtained, Pegasus will compile the package for the customer. The package, which includes a guidebook,
contact numbers in the foreign country, as well as the ticket, hotel booking confirmation etc. will be
mailed to the customer, who is at the end of the distribution channel.
Pegasus will have many alliances with foreign tour operators: In Europe, the main partner will be
Horizon Travel in Athens Greece. Others include Voyages Lorraine in France, Gatehouse Travel in the
U.K., Imagine Tours in Belgium, and European Travel Inc. Over time, other alliances will be sought out
and established.
Promotion
Pegasus will market to customers online through advertisements on specific sites. In the first
phase, the web sites most used by seniors will be targeted. This includes senior.com and aarp.com. The
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Section 5: Sample Business Plans
Company will need to build trust amongst seniors since security and the safety of information are two of
their primary concerns. Associating with trustworthy web sites will also enhance the Company’s
credibility.
Television will also be utilized. The Travel Channel will provide a great outlet to reach the target
market. Shows of interest to seniors such as “Great Rail Adventures” and “Hidden Treasures” will further
increase the Company’s brand awareness. This will be the most expensive advertising mediums, so the
number of Pegasus “spots” will be limited, and further advertising will be based on past effectiveness.
The Company will spend $40,000 in the first month advertising on the Travel Channel. $10,000
will go into the travel section of the New York Times and USA Today, and $2,000 towards banner ads on
senior.com. Every winter Pegasus will focus its advertising strategy on television, and concentrate on
print ads in the summer. At least 20% of the budget (see financial pages) will go into newspaper
advertising with publications such as the Detroit Free Press and the Philadelphia Inquirer.
The Company will also use “give away” promotions to increase awareness. Other possible
strategies would be a free vacation to the parents of a college graduate. This will allow the Company to
reach a large number of target customers (at a large university) and possibly receive free publicity. The
Company will also offer discounts for credit toward a future trip.
VII. Organizational Plan
Pegasus will be established as an S-Corporation. The principal shareholders will each assume an
equal stake in the business.
After considering the pros and cons of each form of ownership, the Company agreed that the SCorp would be the most beneficial structure. A significant advantage of the S-Corporation is the ability to
avoid double taxation.
The second benefit from being an S-Corporation is that the shareholders retain the limited
liability protection of a C-Corporation. Shareholders are only liable for the amount of their investment.
Management Team Background
Kimberly Peters – President
Kim Peters was born in Amherst, Massachusetts and graduated near the top of her class at
Amherst High School. She is currently earning a general management degree in marketing and human
resources. Kim represented his high school at the Massachusetts Free Enterprise Week, winning the “Best
Return on New Assets” award. She went on to represent her country at the Bosphprus International
Student Congress on entrepreneurship, and walked away as the CEO of the winning Company. She has
worked in many different organizations ranging from small entrepreneurial firms (Mann & Co.) to large
corporations (The American Red Cross). She has experience in customer service and promotions.
Business Plan C: Pegasus Travel
658
Entrepreneurship
As president of the Company, Kim will be responsible for strategic development, hiring, firing,
major asset acquisition, and capital expenditure decisions. Her day-to-day activities will involve
establishing corporate partnerships, training and supervising employees, and dealing with major customer
service problems. Kim will run monthly meetings with the Board and the vice presidents. She will also be
in charge of handling any disagreements among the workforce.
Christa Bentley – Finance and Accounting Manager
Christa was born in Sydney, Australia and is currently earning her Bachelor’s degree in Finance
and Marketing at Boston College. Through her coursework and academic experience, she has acquired
knowledge on the various aspects of finance. Furthermore, her employment in the largest bank in
Singapore assisted in the development of her analytical skills.
Duties
Christa will be responsible for finance, accounting, payroll, billing, taxes, check signing, and any
other matters related to sales and revenue budgets. She will also be in charge of the financial statements
and be responsible in choosing an appropriate accounting firm.
Jack H. Welch – Public Relations/Information Technology Manager
J.H. Welch is highly qualified as a public relations and information technology manager, having
worked in the John Hancock Agency in Boston as a Management Information System intern. Currently he
works in the Student Help and Support Center at Boston College as a User Assistant. Through his work
experience, he has acquired the necessary interpersonal skills needed in the public relations field.
Duties
Jack’s responsibility as a public relations manager include overseeing the customer service aspect
of the Company. He will be in charge of handling customer complaints and the hiring of customer service
representatives in the future. Furthermore, he will develop the customer service toll-free hotline that will
be introduced. His role as IT manager requires him to develop, maintain ,and update the web site of
Pegasus, and to ensure the smooth running of web operations.
Yoriko Nomo – Marketing and Sales Manager
Yoriko Nomo will assume the role of Marketing and Sales Manager. Her resume includes
working for nine months in Carlson Wagonlit as a travel agent. Her experience of serving customers,
arranging trips, making reservations, and issuing tickets over the computer will enable the firm to
efficiently start its operations. Furthermore, she has three months of experience as a registration
representative at SkyPerfect TV in Japan, where she assisted customers with registration over the phone
and supported them with the appliances’ technical problems.
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Section 5: Sample Business Plans
Duties
Yoriko will be responsible for creating promotional activities, monitoring sales, and performing
the necessary market research to determine how best to improve the Company’s awareness. She will also
be responsible for the design and distribution of all promotional and advertising materials.
Sandrene Bouchet – Administrative Manager
Sadrene Bouchet is currently on exchange at Boston College from a business school in France.
Her courses include Introduction to Marketing, Statistics, International Marketing and Entrepreneurship.
Her work experience includes a stint at Cora Supermarket where she was in charge of sales analysis in the
food department. She also submitted a new map of the department to increase sales figures.
Duties
Sandrene will oversee the daily operations of the business. Her responsibilities include the hiring
and firing of employees as well as training and supervision. She will also handle all purchases needed for
the office, and be responsible for the opening and closing the office daily.
Organizational Chart
Board of Advisors
Kimberly Peters
President
Christa Bentley
Financial
Yoriko Nomo
Marketing
Manager
J. H. Welch
PR/IT Manager
Sardrene Bouchet
Director of Admin.
Customer Service
Business Plan C: Pegasus Travel
660
Entrepreneurship
Board of Advisors
Apart from the management team, Pegasus will have a Board of Advisors consisting of qualified
individuals who will provide their expertise to the Company in return for compensation of $300 per
meeting, and an equity stake when the Company goes public. The Board of Advisors’ function is to serve
in an advisory capacity for the various functions and activities of the Company. The Board of Advisors
includes:
●
Mr. Henry Chuang – Manager of Carlson Wagonlit Travel Agency in Boston. His experience of
managing a tour agency as well as Pegasus’ alliance with Carlson will be beneficial.
●
Professor Maria Sannella – Professor in the marketing department of Boston College. Her
expertise in the field of knowledge is much needed by the Company.
●
Professor Mary Cronin – E-commerce professor at Boston College. Pegasus can use her advice to
create and update its web site.
●
Courtney Wark – a professional E-commerce consultant who has been working with IBM in
South Carolina for three years. Her experience from working with other E-commerce companies
will benefit Pegasus tremendously in the development of its web site.
VIII. Assessment of Risks
The potential success of Pegasus could be affected by any unexpected changes in the economy.
Efforts will be made to monitor changes in the industry and economy, and adjust offerings accordingly.
The government could decide to regulate Internet companies or on-line travel, due to concerns
over security. If fraud gets out of control, or if airline security gets compromised (terrorists using Internet
sites to book fake passengers to hijack planes), new regulations could increase costs, or force serious
changes in Company operations.
Trouble in popular vacation sports, such as the conflict in Israel, will affect travel choices and
possible revenues. The Company must make sure to offer better deals to different areas not in conflict.
The devaluation of the dollar could also be a significant problem. If customers cannot get much in
return for their money, they will not be able to travel abroad. This can be overcome by offering more
domestic travel, and to countries where the dollar is still strong. It is important to continue to diversify the
product line and client base (get many branches throughout the world) to keep risk minimized.
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Section 5: Sample Business Plans
IX. Financial Plan:
PEGASUS TRAVEL.COM
PRO FORMA INCOME STATEMENT
THREE-YEAR SUMMARY
Sales
Less: COGS
Gross Profit
Operating Expenses
Selling Expenses
Technology Development
Advertising Expenses
Salaries, Wages
Office Supplies
Rent
Utilities
Insurance
Depreciation
Total Operating Expenses
100%
50%
50%
Year 1
$1,765,650
$882,825
$882,825
Year 2
2,295,345
1,147,673
1,147,673
Year 3
2,983,949
1,1491,974.50
1,1491,974.50
40%
28%
20%
29%
1%
1%
1%
1%
.19%
119%
$706,260
$494,382
$353,130
$512,039
$10,000
$16,652
$594
$8,828
$3,300
$2,105,185
734,510
533,933
459,069
584,039
13,083
17,651
689
8,828
4,361
2,356,163
771,236
555,290
596,789
680,039
16,415
18,710
776
8,828
2,653,752
Profit (loss) before taxes
Taxes
Net Profit (loss)
-70%
-1%
-70%
($1,222,360)
$16,244
($1,238,604)
-1,208,491
21,117
-1,229,608
-1,161,777.50
27,452
-1,189,229.50
The initial investment of $2,105,185 will be acquired through venture capitalists and bank loans,
which will be paid off over 12 years. Given the low capital intensive nature of the business, the
Company’s start-up costs and working capital are less than other e-commerce ventures. The Company is
willing to offer a reasonable portion of equity to attract investors.
Business Plan C: Pegasus Travel
662
Entrepreneurship
PEGASUS TRAVEL.COM
PRO FORMA INCOME STATEMENT FIRST YEAR BY MONTH ($000s)
Sales
Less:COGS
Gross Profit
Jan
130
35
95
Feb
103
22
81
Mar
133
41
92
Apr
140
61
79
May
147
65
82
June
159
85
74
July
162
102
60
Aug
179
114
65
Sept
137
82
55
Oct
156
92
64
Nov
154
86
68
Dec
166
98
68
Operating Expenses
Selling Expenses
Advertising Expenses
Salaries, wages
Office Supplies
Rent
Utilities
Insurance
Taxes
Depreciation
85
62
40
1.6
1.3
0.04
0.6
1.2
0.27
60
19
38
0.7
1.3
0.04
0.6
1.2
0.27
32
18
38
0.7
1.3
0.04
0.7
1.3
0.27
40
41
38
0.7
1.3
0.04
0.7
1.3
0.27
60
43
41
0.7
1.3
0.04
0.7
1.3
0.27
47
28
41
0.7
1.3
0.09
0.7
1.3
0.27
323
24
41
0.7
1.3
0.09
0.7
1.4
0.27
40
23
52
0.7
1.3
0.04
0.7
1.4
0.27
62
25
40
0.7
1.3
0.04
0.7
1.4
0.27
81
10
53
1.4
1.3
0.04
0.7
1.4
0.27
82
29
45
0.7
1.8
0.04
0.8
1.5
0.27
84
31
45
0.7
1.8
0.04
0.8
1.5
204
124
95
124
126
164
118
125
131
149
161
165
(109)
(43)
(3)
(45)
(44)
(90)
(58)
(60)
(76)
(85)
(93)
(97)
0
(109)
0
(43)
0
(3)
0
(45)
0
(44)
0
(90)
0
(58)
0
(60)
0
(76)
0
(85)
0
(93)
0
(97)
Ttl Operating
Expenses
Profit (Loss) before
tax
Taxes
Net Profit(loss)
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Section 5: Sample Business Plans
PEGASUS TRAVEL.COM
PRO FORMA CASHFLOW FIRST YEAR BY MONTH ($000s)
Jan
Receipts
Sales
Disbursements
COGS
Selling
Expenses
Salaries
Advertising
Office Supplies
Rent
Utilities
Insurance
Taxes
Ttl
Disbursement
Cash Flow
Beg. Balance
Feb
Mar
Apr
May
June
July
Aug
Sept
Oct
Nov
Dec
91
111
124
138
145
155
161
174
150
150
157
162
28
42
25
73
37
46
57
36
64
50
81
54
99
40
112
37
88
51
90
72
87
82
96
83
40
62
0.96
1.3
0.04
0.48
0.84
38
19
1.1
1.3
0.04
0.6
1.2
38
18
0.7
1.3
0.04
0.68
1.3
38
23
0.7
1.3
0.04
0.7
1.3
41
43
0.7
1.3
0.04
0.7
1.3
41
41
0.7
1.3
0.04
0.7
1.3
41
24
0.7
1.3
0.09
0.7
1.4
52
28
0.7
1.3
0.04
0.7
1.4
40
25
0.7
1.3
0.04
0.7
1.4
53
10
1.1
1.3
0.04
0.7
1.4
45
29
0.9
1.8
0.04
0.8
1.5
45
31
0.7
1.8
0.04
0.8
1.5
175.6
159
143
158
202
140
208
233
208
229.5
248
259.8
-84.6
0
-48.2
-19
-19
-32.3
-20
-10.3
-57
12.8
15
47.8
-47
16.9
-59.2
80
-58.1
140
-79.5
198.3
-91.04
277.8
-97.8
368.9
Pegasus forecasts its first year sales to be 5% of Travelocity’s revenue in 2000, with projected
increases of 30% per year. The Company budgets 20% of sales for advertising, in order to attract travelers
and increase market share. Advertising and technology development expenses will decrease in years #2
and #3, in line with a goal to become profitable by the end of year #5.
The Company assumes that most sales will occur in September and December, as seniors are
most flexible with their travel plans and the best fares are offered by the airlines during these months.
Because December is a high travel period, the Company has increased its anticipated salary and
commission expense proportionately. Remaining operating expenses such as office, rent, utilities and
insurance are assumed to remain flat throughout the year. Reservation computers and ticket printer
expenses are included in office supplies.
Business Plan C: Pegasus Travel
664
Entrepreneurship
EXHIBIT 1
Major Players in Competitive sectors
Traditional Travel Agencies
*Note: most of these travel agencies have already incorporated the “click and mortar” approach.
●
Carlson Wagonlit Travel
●
American Express
●
World Travel
Online Travel Agencies
Full Service
●
Travelocity.com
●
Expedia.com
●
Amadeus.com
●
ByeByeNOW.com
Name-your-price
●
Priceline.com
●
Cheaptickets.com
Umbrella Agents
●
EGulliver.com
●
iwant.com
●
respond.com
Airline Companies
●
US Airways
●
United Airways
●
American Airlines
Instructor’s Manual
665
Section 5: Sample Business Plans
EXHIBIT 2
Competitive Sectors’ Strengths and Weaknesses
Competitive Sectors
Traditional Travel
Agencies
Online Travel Agencies
Airlines
Strengths
● Provide more personalized
service
● Seeing increase in number of
referrals from online travel
agencies
● Provide a sense of security that
the Internet cannot
● Provide research and booking
services for customers.
Consumers prefer to book tours
through traditional travel
agencies, and use the Internet
for research only
● Ability for traveler to choose
different air fares at reduced
prices
● Low start-up costs
● Most frequently used ecommerce service on the
Internet
● Offers other services such as
personalized weather reports,
stock quotes and airline-specific
“fare alerts”
● Number of online travel agents
users expected to grow from 54
million to 72 million in 2002
● 1999 online travel revenues
accounted for more than 30% of
all B-to-C revenues
● Provide flexibility and
convenience of the Internet
● Low overhead costs
● Projected sales of $29 billion in
2003
● Large untapped market potential
in Europe, Asia and Latin
America
Weaknesses
● Revenue declining, as more
and more travelers migrate
toward online services
● Commission cuts by airline
companies
● Charge high booking fees
to pay overhead expenses
● Do not offer 24 x 7
customer access
●
●
●
Offer both traditional and online
services
Established brand name
●
●
●
●
●
●
Business Plan C: Pegasus Travel
666
Difficult to automate
personalization and
“human touch” with the
efficiency of the Internet
Takes considerable time
and energy to effectively
research all the best online
fare options
Requires consumers to be
Net savvy. Only
experienced users can
make the Internet more
cost effective than a
traditional travel agent by
being able to locate
favorable fares
Although 45% of all
vacation travel is now
researched on the Net, only
4 percent of sales are
actually booked online
Online credit fraud is a
major concern of Internet
users
Customers have little or no
loyalty to a particular
airline
60% of carriers identified
Entrepreneurship
●
●
●
Ability to offer unsold seats at a
very low and competitive price
Do not charge extensive service
or booking fees associated with
traditional Travel agents
Increasing use of e-ticketing
●
●
Instructor’s Manual
667
their own web site as the
most important element of
their online presence, but
only 50% of these airlines
actually sold tickets
electronically
High overhead (i.e. selling
and marketing expenses)
Heavily relies on travel
trade to sell about 85 % of
its tickets
Section 5: Sample Business Plans
EXHIBIT 3
Pegasus Web Site
Business Plan C: Pegasus Travel
668
Entrepreneurship
PEGASUS TRAVEL.COM
PREAMBLE TO THE TEAC HING NOTE
Instructors:
As the Pegasus Travel.com case is somewhat non-traditional and only being printed in the
Instructor’s Guide as an addendum to the textbook, we wanted to offer some commentary on its origins,
and thoughts on its possible positioning and use in your course(s):
1.
History: This case was originally taught toward the end of the semester in an MBA class at
Boston College, entitled “Business Planning and Entrepreneurship.” For the past eight years, we
have regularly divided our incoming class into approximately twenty teams of five students each,
and teach a required class whose sole deliverable is a full-length business plan. While the official
text for the course has always been the Entrepreneurship book, early student feedback indicated
that other, practical teaching materials would also be helpful in rounding out the experience. In
subsequent revisions of the book, we responded by including actual case studies. “Good, but not
ideal,” came the second wave of student comments. We ultimately countered by writing the
Pegasus case, and ever since then, are pleased to report that the evaluations have soared. In fact,
the students have indicated that they’re as equally pleased with the discussion, as they are with
the case itself! So much so, that they have specifically requested its inclusion towards the
beginning of the semester, to help set-the-stage for the entire business plan writing process.
2.
Objectives: The utility of the Pegasus case is ironically rooted in its many foibles; by design, it’s
anything but a perfect business plan. However, therein lies the point. Teaching experimentation
over the years has taught us that both MBA and undergraduate students learn more by studying
flawed business plans, than they do by reviewing perfectly written documents. For some reason,
giving them the ‘answers’ never seems to translate into higher quality work, or a larger
probability of actual business success. Through our own trial and error, we’ve arrived at a
strategy that employs a ‘modified’ Socratic teaching method. While we still engage in the classic
answer-with-a-question mentality, the discussion is focused around an imperfect business plan,
rather than on an award-winning one. Students are instructed in the preparation to convert the
ideas and strategies of the Pegasus Travel.com into an acceptable business plan that the
entrepreneurs could confidently submit to potential investors.
3.
Clarification: It’s also important to note that Pegasus is not technically even a case study, but
rather a Business Plan Analysis Simulation. The plan is based on an undergraduate project idea
and a significant amount of additional research and written input from the authors. While the case
contains enough depth to warrant a robust discussion on the Pegasus’ strategy and future direction
as a bona fide business, the real objective is to aid the students in more effectively completing
their own business plans. In short, carefully following the Teaching Note below will hopefully
open your own students’ eyes regarding the difference between their intent as writers, and the
probable conclusions of the audience reading it. Seemingly innocuous statements in any business
plan, when not properly fleshed out or fully analyzed by the management team, can quickly turn
into ‘fatal flaws’ by those reading the document for the first time. As we all know, it’s always
easier to spot those mistakes in the work of others, than it is in your own.
Instructor’s Manual
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Section 5: Sample Business Plans
4.
5.
Disclaimers: Finally, two important to disclaimers we wanted to offer:
a.
This case was written well before the September 11th tragedy and does not attempt to
reflect the current nature of the U.S. and worldwide travel industry. The terrorism
reference in the Risk Assessment section was merely an eerie coincidence, and is not
meant to offend any instructors or students by its inclusion.
b.
Given the somewhat contrived nature of this case study, we openly acknowledge the
shortcomings of the industry data. It is neither exhaustive nor timely. In some cases, it
might even be perceived as incomplete. Please remember that the teaching goals are
aimed at improving the students’ future work, and not in dissecting the operations of a
functioning start-up.
Contact: Should you have any questions on any aspects of the Pegasus case itself, or its
accompanying Teaching Note, please feel free to contact us at any time. Michael Peters
([email protected]) and Gregory Stoller ([email protected]). We look forward to hearing
from you!
Business Plan C: Pegasus Travel
670
Entrepreneurship
PEGASUS TRAVEL.COM
FASTEN YOUR SEATBELTS! **
TEACHING NOTES
Case Abstract:
Pegasus Travel.com (“Pegasus” or “the Company”) is a niche online operator specializing in
customized and package tours for the age group of 55 and over (referred to as seniors). It is based on the
belief that, as an increasing number of seniors become users of the Internet, combined with an interest in
traveling, they will provide a lucrative market for Pegasus. The Company provides the option for
flexibility in its tours, allowing the consumer to decide on length of stay, budget, destination and so forth.
Apart from the customized tours, tour packages will also be sold. Through its web site, seniors are able to
gain insight into tours they might be interested in as well as chat with other similarly oriented people. The
comprehensive web site provides links to relevant sites, free e-mail addresses and a sense of community.
Pegasus will align itself with a well-known travel agency, Carlson Wagonlit Travel. Its reputable name
will give Pegasus’ customers assurance and trust. The Company can also take advantage of Carlson’s
expertise and operations in many parts of the world.
Objectives:
This sample business plan has been purposely written to contain major flaws and gaps in the
presentation of all sections of a legitimate business plan. It can be used as an exercise during the
preparation of the business plan module of the entrepreneurship course. The general objective is to have
students read the case and then ask the question “What can we specifically do to make this business plan
presentable to investors?” The discussion should not focus initially on the benefits of this plan as a
potentially successful enterprise but more so on how to make it acceptable for external investors. In doing
this some of the issues that can be addressed are discussed below. The instructor may find that there are
many issues beyond those presented below that can be used in class discussion. It is conceivable that this
assessment can be easily expanded to another class period if desired.
1.
Process: Study the process entrepreneurs use to effectively present their ideas to potential
investors and sources of capital.
2.
Analysis: Provide students with a sample, full-length business plan, and lead them through the
process of rigorous analysis, highlighting the plan’s positive and negative attributes.
3.
Strategy: Assessment of strategic options available to Pegasus Travel.com as it attempts to raise
$2,105,185, with an emphasis on its marketing and financial strategy and projections.
Teaching Approach:
**
Copyright © 2001, December 2003. Michael Peters & Gregory Stoller.
Instructor’s Manual
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Section 5: Sample Business Plans
This teaching note assumes a 90-minute class to teach this case. The instructor should take the
class through each section of the business plan (see suggested timing), highlighting many of the concerns
listed below.
A.
B.
C.
Introduction (5 minutes)
1.
Nothing is written under co-owners
2.
Unclear why this type of venture requires bank loans. What collateral would be available
to lend against? Also, interest expense is not included in financial statements.
3.
Legalese under confidential disclaimer has obviously not been written by an attorney, and
already makes the business plan appear suspect.
Executive Summary (10 minutes)
1.
The case is based in 2000. Growth from $8 billion to $21 billion over a two year period
represents a CAGR (compound annual growth rate) of 62% per year. For an unproven
sales medium, these projections seemly overly optimistic.
2.
The Executive Summary violates a basic principle of business plan writing: On the very
first page, describe in-depth what competitive advantages the Company brings to the
marketplace and how the venture makes money.
3.
The third paragraph is far too general. For example, what is meant by customer retention
through “advertising and services?” How many banner ads will be placed and what
advertising frequency is planned?
4.
It’s obvious the Executive Summary was written first, instead of last, as the industry
forecasts later on in the business plan (see pages 646, 650, and 654) are inconsistent with
those in the Executive Summary.
Industry Outlook, Forecast & Trends (15 minutes)
1.
It would have been helpful to have presented the travel industry statistics with a graph.
This is a good example of solid research losing its edge, and effectively becoming useless
to the reader, due to poor presentation.
2.
It’s unclear what value the statistics on rental cars, railways and cruise lines provide. This
space could have been used more effectively by continuing the discussion from the
previous paragraph on the growth and development of the online travel and tourism
industry.
3.
The European market should have received top billing in this section of the plan since it’s
the Company’s main target market. By placing it at the end of this section, its importance
is reduced.
4.
There are two main problems with the Forecast section: (1) Different data is provided on
the same industry segment by Jupiter Communications, without any reference to the
previously described Forrester Corporation research. (2) There’s no revenue forecast
included! The business plan simply provides a hypothetical in terms of market share
possibilities.
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D.
E.
F.
5.
It’s unclear how the Market Segmentation section adds any value to the business plan.
While it correctly highlights price, age and travel purpose as important factors, it doesn’t
address how the Company will effectively capitalize on those areas.
6.
The Target Market section is confusing. In earlier paragraphs, the Company indicated it
would be targeting European markets. Now, it’s suggesting that seniors would be an ideal
market. In addition, while the plan provides good demographic information on seniors, it
fails to demonstrate the crucial evidence of online travel spending by seniors. If both
target markets are that attractive, why can’t they be pursued concurrently?
7.
While the Competitive Sectors portion of the plan is well written, the writers stop short of
providing detailed evidence or implications for the Company on:
a.
How much of a decline in the need for traditional travel agencies is projected?
b.
Is a CAGR of 6% per year high or low for this industry?
c.
How much of a threat is hotwire.com? Can any revenue, market share or earnings
statistics be provided?
d.
Bottom line: How do each of these competitors affect the Company, and what
will the Company’s competitive response be to each player?
e.
The Competitive Advantage section should have provided quantifiable evidence
detailing Pegasus’ edge, with information on projected margins compared to
industry competition. It’s also unclear how the Company will be able to remain
competitive, if the majority of tours are customized…
Description of Value (5 minutes)
1.
This section of the plan never really comments on the “value add” of Pegasus. It is more
of a continuation from the Competitive Advantage paragraph preceding it.
2.
Beacon Street is a major thoroughfare in the Brookline, Massachusetts area, and as a
result is a coveted “address” for offices and retailers alike. Rent expense in the hot areas
of Brookline is anything but reasonable.
3.
It’s unclear how the backgrounds of the entrepreneurs directly contribute to the venture.
They have no relevant experience in the travel industry.
Operational Plan (5 minutes)
1.
While this section of the plan is well written, it fails to provide any data on Information
Technology (IT) capital expenditure requirements.
2.
This writers of this section used “open ended phrases” to make the plan appear more
professional. For example, what are “necessary arrangements?”
3.
How do the extras described on page 653 affect Pegasus’ projected gross margin?
Marketing Plan (20 minutes)
1.
The market share statistics (.01%) of pages 648 and 654 of the case were calculated by
taking the 2004 projections of $2.9 million and dividing by the total industry size of
$23.4 billion.
2.
It’s unclear why specific financial projections are included in the marketing plan.
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3.
Instead of providing market share projections for the general travel and tourism industry,
the management team should have focused on the online segment instead.
4.
This would have been an ideal section to describe:
5.
G.
a.
Typical revenue and cost model
b.
Projected unit projection and mix for different services/tours
c.
Detailed advertising strategy
d.
Estimated cost of achieving market penetration targets
e.
Return-on-investment forecasts for strategic alliances
f.
Results of initial focus group and/or direct mail campaigns
g.
Competitive intelligence on items a. – f.
While the SWOT analysis (Strength - Weaknesses - Opportunities - Threats) is on the
right track, the following enhancements could have been included:
a.
Quantification of each SWOT attribute
b.
Consistency with other section of the business plan: if Pegasus is targeting
European seniors, why are Japanese, Cantonese and Indonesian important
languages?
c.
Consideration of exogenous factors, such as foreign exchange, transaction costs
and travel visas.
6.
Although the Service Development Strategy section is innovative, it’s unclear whether
Pegasus has a core competence in all of the suggested areas.
7.
The financial projections do not include the direct and indirect costs of staffing a 24-hour
Emergency Customer Service hotline for the Company (Customer Service section)
8.
It would have been helpful to provide a pricing example, as suggested in above (Pricing).
9.
ARC and TATA are mentioned for the first time in the Distribution section of the
business plan, further indicating that the business plan was written by a group of different
writers who didn’t compare notes prior to printing the final version.
10.
The business plan’s promotion section should have been included in the Goals and
Objectives of the Marketing Plan section above. In addition, frequency and individual ad
cost should have been highlighted.
Organizational Plan (5 minutes)
1.
Non-US citizens cannot be members of an S-corporation
2.
Instead of providing a description of an S-corp, it would have been more helpful to
provide justification for this incorporation choice. For example, has an S-corp been
chosen due to the personal tax situation of the management team members?
3.
The duties of the main members of the management team are usually self-explanatory
and should not be included. Instead, this space should be dedicated to a discussion of how
the management team members’ backgrounds can increase the probability of success for
this venture.
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4.
H.
I.
The Board of Advisors should include a combination of key investors (“who you raise
money from is more important than the money itselfӠ) and individuals selected for their
strategic contributions. There are too many professors represented on this panel. In
addition, until the Company prepares a prospectus for an IPO, compensation and equity
stake data should be excluded.
Assessment of Risks (5 minutes)
1.
This section could have been improved far more by providing a contingency plan for
each of the highlighted risks.
2.
Sensitivity analysis for the financial projections should have been included here.
3.
A description of the key strategic “levers” affecting Pegasus should also have been listed.
Financial Projections (20 minutes)
1.
Income Statement:
a.
None of the expense categories varies over the 3-year projection. Although
revenue will increase by over 150%, these projections imply the Company will
be unable to achieve any economies of scale.
b.
It appears a 50% gross margin has been chosen arbitrarily. What is included in
COGS?
c.
Do selling expenses include commissions, or have these been budgeted
elsewhere?
d.
Without a detailed breakdown of capital expenditures, it’s almost impossible to
evaluate whether the budgeted technology development expenses are reasonable.
In addition, why are these expensed, rather than capitalized?
e.
Advertising expenses do not detail the breakdown between the different types of
media described in the text.
f.
If the founders aren’t receiving any direct compensation, how many staff
members are included in these amounts? In addition, have benefits of 30% been
included?
g.
Office supplies is the one item with a reasonable estimate.
h.
Based on a 1,000 square-foot retail space, the cost / square foot is only $17—this
is far too low for a Beacon Street address.
i.
Real estate taxes have not been included in the Utilities section.
j.
Does insurance also cover general liability and E&O (Errors & Omissions)
insurance?
k.
What does Depreciation cover? Where is the capital expenditure worksheet?
l.
If bank loans will be used, where is the Interest expense?
m.
What is meant by “reasonable portion of equities?”
†
This is a key quote from Professors Bill Sahlman and Howard Stevenson in their Entrepreneurial
Finance course at Harvard Business School.
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2.
3.
Statement of Cash Flows
a.
This section should have been named “Sources and Uses” of cash.
b.
Sales has to be broken down by either unit or transaction mix.
c.
Capital expenditures are notoriously absent from the Uses of Cash section.
d.
A proper Statement of Cash Flows detailing Cash Flow from Operations,
Investing Activities and Financing Activities should have also been included.
Balance Sheet
a.
4.
5.
A basic balance sheet should be provided (Assets, Liabilities and Owner’s
Equity), or at the very least, a simple statement detailing the mix between equity
and bank loans. However, most banks will not lend to this type of start-up, due to
lack of collateral.
Revenue Rationale
a.
Although the text attempts to provide a rationale for its financial projections, this
should have been included at the beginning of the section.
b.
It’s unclear why Travelocity has been chosen, since it was only mentioned once
on page 651.
c.
A 30% increase per year is less than 50% below the 62% CAGR provided in the
Executive Summary. This implies Pegasus will grow more slowly than the
market each year…
d.
It would have been helpful to include a Seasonality Index to account for annual
travel changes, and the associated expenses.
e.
It’s unreasonable to assume that the “rest of the operating expenses” do not vary
throughout the year (i.e. real estate taxes are paid quarterly, utilities will be
higher in the summer and winter due to weather changes, rent will increase at
some point during the year, etc.)
Financial Statement Presentation
a.
Chapter 10 of Entrepreneurship (Hisrich/Peters, [Irwin McGraw-Hill]) provides
a basic overview of the required financial components and transaction
breakdown.
b.
Search the EDGAR database
(http://www.sec.gov/edgar/searchedgar/webusers.htm) to view how your specific
industry presents its income statement, balance sheet and statement of cash flow
statements. Different accounts will be included and/or emphasized. Form 10-K
(annual report) will provide the best overview. Make sure to select the HTML
version for best viewing. Entrepreneurs with poorly presented financial
statements lose credibility almost instantly.
c.
“Ratio Comparisons” in the Quotes section of Yahoo’s Finance Section will
provide a good basic overview of the financial levers affecting company
performance. This will be an effective departure point for entrepreneurs to begin
considering the other qualitative and quantitative levers affecting their start-up’s
operations.
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d.
After “crunching the numbers” for bullets a. through c., at the very least
entrepreneurs should present different scenarios of their data under the following
assumptions to determine their impact on the cash balance:
●
Revenue +/- 10%
●
Unit Mix change
●
COGS +/- 10%
●
Capital Expenditures +/- 20%
The objective is to calculate a start-up’s “financial staying power.” This is
entirely different than a best case/worst case scenario, and instead shows how
changes in individual assumptions affect an entrepreneur’s most precious
resource: cash. Ideally, instead of presenting the data based on a +/- change, a
range of values should be used (i.e. how low can revenue go and still enable the
company to “stay alive” the following year? What growth rate will be necessary
to match the industry’s CAGR?)
After completing these computations for financial levers, the process should be
repeated for each of the strategic levers affecting the business. Once again,
whenever possible, quantification of each lever should be attempted.
e.
One of an investor’s first “jobs” after receiving a plan should be to re-engineer
the financial statements presented, in order to determine the venture’s bottomline-- the probability of the investment becoming a total loss, and what the extent
of the financial exposure would entail.
The second task is to then realistically compare the business plan’s financial
projections with those of its direct competitors. 15 companies in the same market
cannot each “conservatively project” a 10% market share! What justification
does the business plan contain that this company will be able to beat the odds?
Lastly, investors are “kept up at night” by the answers to 2 key questions, as
noted above, which should be quickly answered by a well-written Executive
Summary:
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(1)
What competitive advantages the company brings to the marketplace and
how does the venture make money?
(2)
Why do I believe this team will enable this venture to be successful?
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